Week in Review: Fed Charts Course

Federal Reserve Chair Jerome Powell said this week, at an event hosted by the International Monetary Fund, that a 50-basis-point rate hike could be “on the table” and that “it is appropriate…to be moving a little more quickly.” In addition, Powell suggested that front loading the rate hikes may be required to combat sticky inflation. The market is now pricing in a 50 basis point hike for the next three meetings in May, June and July.

“Central bankers need to act decisively on inflation now to ensure a smooth landing,” IMF’s chief economist Gita Gopinath stated this week. Globally, central banks are now tasked with ensuring a soft landing for their respective economies, weighing up rate hikes against supporting growth. Although the majority of central banks are striking a hawkish tone, recent warnings of slowing growth, specifically in the Euro area, could complicate the path. However, European Central Bank president Christine Lagarde, freshly stated that “there is a high chance rates will be increased this year.”

The Russian-Ukraine war continued into its 8th week, with Vladimir Putin recently claiming that Russia had seized the strategic port city of Mariupol, even though heavy fighting continues in the area. The war has shown few signs of ending soon and its impact is still being measured globally. However, it is clear that the conflict in Eastern Europe has deepened western alliances, resulting in a move from globalisation to regionalisation.

Chinese markets had a tough week, as investors worried about the economic repercussions of their harsh, nationwide covid-19 lockdowns. Foreign investors pulled 5.6 billion yuan ($868 million) from mainland stocks this month after selling 45 billion yuan ($7.1 billion) in March, the largest withdrawal in nearly two years. President Xi Jinping, however, defended the lockdowns, claiming that “Safety and health are the prerequisites for human development and progress.”

Economists, polled by Bloomberg, have cut China’s 2022 growth outlook (measured by Gross Domestic Product) from 5% to 4.9% due to the lockdowns’ negative impact on the economy and supply chain. Bloomberg stated that it could take up to three months before supply chain disruptions from China’s current lockdowns are felt in the U.S, adding to the drag on global growth.

It’s earnings season in the U.S., and less than 20% of S&P 500 companies have reported earnings so far. According to FactSet, the blended growth rate for earnings is up from 4.7% at the end of the quarter, to 6.5%. Most notably, shares in the consumer staples sector gained ground after reporting their results. Yet, a number of shares have come under pressure as fewer companies are beating estimates compared to prior quarters. Shares of Netflix fell more than 35% during the week, erasing >50bn of value, as the company reported disappointing quarterly results.

Major indices’ ended the week lower as investors struggled to maintain conviction amidst a complicated global backdrop. In the U.S., the S&P 500 Index dropped -2.75% over the week and is now down -10.94% year to date. The Nasdaq fell -3.83% while the Dow Jones ended the week -1.86% lower. Europe (Euro Stoxx 50) faired better, down -0.23%, while the FTSE 100 dropped -1.24%. Asian indexes were mixed, with the Nikkei 225 being the only major index to end the week in the green (+0.04%), while the Shanghai Composite fell -3.78%. Brent crude dipped -4.52%, while Gold dropped by -2.03%.

Market Moves of the Week

South Africa’s headline inflation rose slightly less than expected to 5.9% (Cons: 6.0%) in March, up from 5.7% in February and just below the Reserve Bank’s upper limit of 6%. Core inflation jumped from 3.5% to 3.8% over the month, surprising to the upside. Petrol inflation and alcohol/tobacco prices were the main contributors to the increase, with food inflation diminishing somewhat.

On Monday, Cyril Rhamaphosa declared a national state of disaster in response to the KZN floods, a move that should allow for a more effective response to the crisis. The floods have left thousands homeless and killed more than 440 people. It is estimated that R5.6 billion worth of road damage was also caused by the floods and mudslides.

The rand weakened the most in five months as power cuts, KZN flood damage and signs of a Covid comeback added to investors’ worries about South Africa’s economic outlook. South Africa’s benchmark bonds and other assets also struggled this week amid expectations of a more hawkish U.S. Federal Reserve.

In other news, state power utility Eskom, warned the country that they may have more than 100 days of load shedding this year.

The JSE All-Share Index fell -1.52% this week. Resources sold off (-7.42%) while Industrials caught a bid (+2.20%). The rand depreciated over 5.5% this week to end at 15.53 USD/ZAR.

Chart of the Week

Global transactions using the euro dropped to 35.4% of the total in March, its biggest percentage-point drop in more than a decade as inflation and the war in Ukraine weighed on the currency's appeal. The dollar remained in the top spot for a 10th consecutive month and has dominated global payments for the most part since 2013, according to SWIFT. Source: Bloomberg

Investor anxiety has been heightened recently by the war in Ukraine and impending rate rises by the Federal Reserve. As such, we advise investors to maintain a calm stance during the crisis, diversify, and maintain exposure to long-term themes. Investors need to look beyond near-term news and gain exposure to industries benefiting from longer-term growth trends.

Our thoughts and prayers are with the victims of this aggression. As always, we appreciate your support and value your trust in StrategiQ Capital.

The information included above as well as individual companies and/or securities mentioned should not be construed as investment advice, a recommendation to buy or sell or an indication of trading intent on behalf of any Strategiq product. Strategiq Capital is an authorised financial services provider (FSP 46624).